Pivot Points On Filling The

Ever find a significant difference in price when the market opened the following session? This can be quite disconcerting if you had an open position at the close of the previous session. What we are talking about here are gaps. They are the result of something happening - news, or whatever - between the close of one session and the open of the next.

Now that 24-hour trading and extended-hours trading are here to stay, it is not unusual to come across significant changes in price at the open of one session from the previous session's close. All markets have their specified times for trading. Each market has its own opening and closing times, called market hours or pit session. Some markets are open for eight hours a day, while others are open for a shorter period. And then you have the forex market that literally follows the sun around the World.

Examples of different trading times include the foreign currencies that trade at the IMM in Chicago from 7:20 am Central Time to 2:00 pm, while the live cattle market opens at 9:05 am Central Time and closes at 1:00 pm.

What is happening around the world between the market's close and the next session's open can have a dramatic effect on how the markets open. A market can open at a different price from the previous session's close due to events or reports that come out while it is closed.

An example would be a company announcing its earnings after the bell - that is, after the stock market closes. If those earnings are lower than was expected, sellers will react to this perceived weakness in earnings, and drive prices down. This causes prices to open somewhat lower than the previous session's close.

Essentially, a gap is an area where no trading has taken place. An opening up gap is where the market opens higher than the previous session's high. An opening down gap occurs when the market opens lower than the previous session's low.

Gaps can catch you off guard. You could easily have a favourable position going into the close, only to wake up the next morning to find that the market has gapped against you. What is even more frustrating is when the market gaps straight through your stop price, giving you a larger loss than you expected.

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(Chart courtesy ProphetCharts.com)

Every so often, gaps will occur, and they can open up or down. The figure above displays an example of the down gap (January 25th, 2002) for the Swiss Franc at the spot marked Z. The size of a gap can have some effect on price direction. Generally speaking, if a gap is relatively wide, some traders will tend to fade it - that is, trade against it. A gap over a certain amount or percentage indicates that the market has overreacted, or that illiquidity of the after hours market has taken over. If the gap is up, some traders will sell at the open in anticipation of the market either closing the gap, or at least settling down to some extent.

In the above example, you can see that the gap created at the spot marked X - December 24th, 2001 - was filled in December 31st, 2001 - at the spot marked Y. Gaps are usually filled in sooner or later.

If you understand this phenomenon, you can see how you can easily make money by anticipating such a move, either on the day that it occurs or subsequently thereafter - in a matter of days.

If commercial traders just happen to be long with their futures positions at the same time such a gap occurs, as on January 25th, 2002, then fill your boots sports fans. Prices have nowhere to go but UP!

Trading with gaps is not just something that works with currencies. It is a strategy that you can use with on any market, including commodities, markets, and stocks.

More on gaps later on.

Please don't forget those weekly numbers! ...

Tracking previous highs and lows and analyzing price action can provide clear indications of trend direction.

As you have probably guessed by now, you should buy at support and sell at resistance. Support is usually described as a previous point at which the market stopped going down, and resistance as the most recent high point at which the market stopped going up. A more definitive approach states that resistance is the previous week's high and support is the previous week's low. If you use trading signals for entry and exit points based on a shorter time scale, such as signals off the daily or intraday indicators in conjunction with weekly highs and lows, then you would be using a multiple time frame approach.

And, if you are trading intraday strategies, then view the daily highs and lows as the key support and resistance points. Drawing conclusions about the state of the market and price action based on support and resistance levels is a classic charting technique. Here we'll look at weekly levels applied to a daily chart to illustrate the value of this concept.

IDENTIFYING THEM

By looking to the previous week's high or low as support or resistance, you can determine the coming week's key levels, which gives you an idea of where to look to enter and exit the markets. If these levels are violated by a daily close past the weekly high or low, it can be considered the beginning of a trend. But how do you identify these key levels?

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Figure: Weekly support and resistance levels. You can identify these by drawing trend lines across the previous week's high and low. The MACD histogram is helpful as confirmation.

According to Dr. Strouse, a floor trader in Chicago indicated to him that weekly pivots are VERY significant to watch as well as daily. More on pivots later.

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